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Why premature deindustrialization is really bad news for development

February 27, 2015

One of the many positives about development is that lots of good stuff is happening much earlier in a country’s trajectory – on average, falling infant mortality, access to healthcare and education, rights, democracy etc all take place at lower levels of GDP per capita than in the past. Unfortunately, guru economist Dani Rodrik has also found something not so positive following the same pattern – premature deindustrialization. Here are some excerpts from his new paper.

From the Abstract:

‘The hump‐shaped relationship between industrialization (measured by employment or output shares) and incomes has shifted downwards and moved closer to the origin (see graph below). This means countries are running out of industrialization opportunities sooner and at much lower levels of income compared to the experience of early industrializers. Asian countries and manufactures exporters have been largely insulated from those trends, while Latin American countries have been especially hard hit. Advanced economies have lost considerable employment (especially of the low‐skill type), but they have done surprisingly well in terms of manufacturing output shares at constant prices. While these trends are not very recent, the evidence suggests both globalization and labor‐ saving technological progress in manufacturing have been behind these developments. Premature de‐industrialization has potentially significant economic and political ramifications, including lower economic growth and democratic failure. ‘

Skip all the equations, and get to this from the conclusions:

‘Premature deindustrialization is not good news for developing nations…. The consequences are already visible in the developing world. In Latin America, as manufacturing has shrunk informality has grown and economy‐wide productivity has suffered. In Africa, urban migrants are crowding into petty services instead of manufacturing, and despite growing Chinese investment there are as yet few signs of a real resurgence in industry. Where growth occurs, it is driven largely by capital inflows, transfers, or commodity booms, raising questions about its sustainability.

In the absence of sizable manufacturing industries, these economies will need to discover new growth models. One possibility is services‐led growth. Many services, such as IT and finance, are high productivity and tradable, and could play the escalator role that manufacturing has traditionally played. However, these service industries are typically highly skill‐intensive, and do not have the capacity to absorb – as manufacturing did – the type of labor that low‐ and middle‐income economies have in abundance. The bulk of other services suffer from two shortcomings. Either they are technologically not very dynamic. Or they are non‐tradable, which means that their ability to expand rapidly is constrained by incomes (and hence productivity) in the rest of the economy.

The political consequences of premature deindustrialization are more subtle, but could be even more significant. Historically, industrialization played a foundational role in Europe and North America in creating modern states and democratic politics. Its relative absence in today’s developing societies could well be the source of political instability, fragile states, and illiberal politics.’

Rodrik admits he’s on ‘speculative ground’ when discussing possible links between deindustrialization and politics, but I’m pleased to say he doesn’t let that stop him. The premature disappearance of an industrial proletariat (historically, the basis for unions and social democracy) has profound political implications:

‘Politics looks very different when urban production is organized largely around informality, a diffuse set of small enterprises and petty services. Common interests among the non‐elite are harder to define, political organization faces greater obstacles, and personalistic or ethnic identities dominate over class solidarity. Elites do not face political actors that can claim to represent the non‐elites and make binding commitments on their behalf. Moreover, elites may prefer – and have the ability – to divide and rule, pursuing populism and patronage politics, and playing one set of non‐elites against another. Furthermore, elites themselves may be much more divided, based on clans or other loyalties. Consequently, grand political bargains become less likely. Political institutions remain fragile and personalized. In short, premature deindustrialization may hamper both the development of middle‐ class values and the emergence of political settlements that allowed the consolidation of democracy in today’s advanced countries.

On the face of it, this conclusion appears to be contradicted by the spread of democracy around the world. More countries in the developing world are formally democratic today than has ever been the case. However, upon closer look, political life in many if not most of these countries is marred by civil rights abuses and popular discontent that periodically erupts in protests and riots. Governments pursue an illiberal brand of politics and are democratic only in name. For the most part, democracy in the developing world remains either a within‐elite affair or takes the form of populism.’

This is a conversational blog written and maintained by Duncan Green, strategic adviser for Oxfam GB and author of ‘From Poverty to Power’. This personal reflection is not intended as a comprehensive statement of Oxfam's agreed policies.

5 comments

This is an interesting article, and definitely raises some good points and has some truth behind it. However, I feel like Rodrik has, as has been mentioned, used a lot of speculation in linking the speed of deindustrialisation to unstable politics. He makes a good argument for it, but the legacy of colonialism in most developing countries and the autocratic nature in which they were used to being ruled still plays a major role in stopping democracy advancing any further. Neopatrimonial systems are also hard to break down, and need to be taken into consideration. However, in the light of this article it is possible to see how more organised labour unions etc. would be beneficial, and in turn how a longer period of industrialisation is important for this.

Really interesting post. A stat that grabbed my attention a while ago was that Egypt produced as many graduates each year as the UK but with an economy about 1/10th the size of the UK. All over the world it’s about where are the jobs going to come from.

Its a really fascinating, yet scary phenomenon – early deindustrialization. Thanks for highlighting it here. What’s peculiar though is that despite the growing acceptance that industry just can’t provide the jobs it used to (not so many flying geese around these days), industrialisation is still the only major recommended path to employment for most developing countries. We need to develop alternative solutions, and fast. There are some proposed solutions here:

I think the question of whether or not we move to a low employment economy is moot. Progress demands that we do more with fewer inputs and that includes labour. My particular area of interest is what the future wealth distribution sysyem looks like? What will be its currency – we won’t be trading labour in a traditional sense, so what will we be trading? Between who and how will we effect trade? These are the burning questions as we slide more rapidly in to this new economy.
Personally, I dont believe that the services sector will be the long term answer. The sector spawns what I like to call faux-jobs – endless numbers of contracting intermediaries that sit between the consumer and the producer and who, instaed of adding value, only add costs. The finacial services sector is a good example of people creating more and more ‘work’ by making systems increasingly complex, less transparent and highly ‘specialised’.
What of the burgeoning ‘maker-economy’? 3D printing and the end of ‘designed redundancy’? Peer to peer networks as units of trade? What new innovations (beyond MPESA) are being developed by communities to effect remittances and trade?
People in developing countries are innovating all of the time – to make their lives easier – and it is in these spaces that we need to be paying attention. The informal economy is huge, still obeys traditional supply and demand and is the site of massive innovation and all the while we focus on the macro… MPESA wasn’t invented by a formal institution, the institution only made an existing practice easier to do, gave it a ‘legal’ face and then extracted fees for it. People with needs made MPESA work and its to these people that we should be looking for new economic models and innovation.

This is a conversational blog written and maintained by Duncan Green, strategic adviser for Oxfam GB and author of ‘From Poverty to Power’. This personal reflection is not intended as a comprehensive statement of Oxfam's agreed policies.